From the Virginia Society of Certified Public Accountants - Presented
by Dean Knepper, CPA, CFP®

TAX BREAKS GET BETTER WITH 2006 INFLATION ADJUSTMENTS

(March 1, 2006) — For 2006, more than 35 tax benefits have been modified
to keep pace with inflation. Here is an overview of the more common ones.

Standard deduction

The standard deduction, which is used by roughly two-thirds of all taxpayers,
is $10,300 for married couples filing a joint return (plus $1,000 for each one
65 or older; $5,150 for single filers (those 65 or older can take $6,400) and
$7,550 for heads of household (those 65 or older can take $8,800). The additional
standard deduction amounts for the aged and for the blind will be $1,000 for
each.

Personal exemptions

Taxpayers can also claim a personal exemption of $3,300 for 2006, up from
$3,200 in 2005. The personal exemption begins to phase out for married taxpayers
filing jointly with adjusted gross income of $225,750 (and is completely phased
out when AGI reaches $348,250). For single filers, phase-out begins at $150,500
(and is fully phased out at $273,000). For heads of household, phase out begins
at $188,150 in AGI (and is fully phased out at $310,650).

For 2006, the amount of the exemption phase-out reduction that would otherwise
apply is reduced by one-third. In effect, even the highest earners will get
$1,000 per exemption for the regular tax.

Tax brackets

The 2006 tax brackets also rise with inflation, which means taxpayers will
see more of their money taxed at the lowest federal rate. For married couples,
that means the first $15,100 of taxable income will be taxed at 10 percent —
as compared to the first $14,600 for 2005. For single filers, the 10 percent
bracket applies to taxable income up to $7,550 and for heads of household the
10 percent bracket applies to taxable income up to $10,750.

Annual gift tax

You’ll be able to make larger gifts this year without triggering the
gift tax. For 2006, the annual gift tax exclusion per donee increases to $12,000,
up from $11,000
last year.

Limitation on itemized deductions

Itemized deductions are limited for taxpayers with incomes over a certain
threshold. For the 2006 tax year, the AGI income threshold at which deductions
begin to be limited is $150,500 for married joint, head of household and single
filers. For married taxpayers filing separately, the threshold is $75,250; the
deductions are
trimmed by two percent of the excess over $150,500 (In 2005, a three percent
rate was used and the phase-out started at a lower level).

Child tax credit

For low-income taxpayers, the per child tax credit is refundable, within limits,
when your child credits exceed your income tax liability. For 2006, the value
used in determining the amount of the credit that may be refundable is $11,300.
The rules are complex, so you will want to consult with a CPA.

Kiddie tax amounts

For 2006, the kiddie tax rules allow a child under 14 to receive $850 —
up from $800 in 2005 — in investment income (from interest, dividends
or capital gains)
free of tax, with the next $850 taxed at the child’s rate, which is typically
lower than the parent’s tax rate. Any amount over $1,700 is taxed at the
parent’s rate. Keep in mind that your child can still owe regular income
tax with less than $1,700 in income. This is only the threshold amount of investment
income for the special kiddie tax.

Section 179 expense deductions

For the 2006 tax year, the maximum expensing deduction for equipment put into
service by self-employed or business owners is $108,000, up from $105,000 in
2005. This deduction is reduced by the amount by which the cost of Section 179
property placed in service during the 2006 tax year exceeds $430,000.

Need advice?

Depending on your circumstances, these changes could affect the amount of
income you choose to have withheld from your paycheck or the amount you pay
in quarterly estimated taxes. A CPA can help you with your tax planning for
2006.

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